Variable life insurance policy
- Thread starter maratikus
- Start date
Variable life policies are like permanent insurance with an investment side car. In traditional whole life insurance you pay your premium and a portion goes to the insurance coverage while another portion goes to the cash value (the side car). So over time the cash value builds up and can be used by the policy holder.
In variable life, what would be place in the cash value part is place in variable subaccounts (think mutual funds). So the cash value part has a variable return instead of the fixed return usually associated with whole life insurance.
They are set up in a number of different ways. I don’t know how deep you want to go….I haven’t got to this part of the texts yet.
In variable life, what would be place in the cash value part is place in variable subaccounts (think mutual funds). So the cash value part has a variable return instead of the fixed return usually associated with whole life insurance.
They are set up in a number of different ways. I don’t know how deep you want to go….I haven’t got to this part of the texts yet.
here is the link to a discussion we had last year about MEC vs. Non-MEC policies within variable life insurance context
http://www.analystforum.com/phorums/read.php?13,661892,661892#msg-661892
http://www.analystforum.com/phorums/read.php?13,661892,661892#msg-661892
volkovv Wrote:
——————————————————-
> here is the link to a discussion we had last year
> about MEC vs. Non-MEC policies within variable
> life insurance context
>
> http://www.analystforum.com/phorums/read.php?13,66
> 1892,661892#msg-661892
Good stuff. Thanks. This is why I read AF.
——————————————————-
> here is the link to a discussion we had last year
> about MEC vs. Non-MEC policies within variable
> life insurance context
>
> http://www.analystforum.com/phorums/read.php?13,66
> 1892,661892#msg-661892
Good stuff. Thanks. This is why I read AF.
I read about this last night and think I have a handle on it. I am too lazy to follow the link above so I may be repeating here…
Insurance companies are given tax exempt status because governments realize that they are doing society a favor by offering insurance. Of course once they have been granted tax exempt status the insurance companies will inevitably attempt to abuse it. A MEC is an example of that abuse.
So it basically boils down to whether more cash is being socked away in a policy than really needs to to cover the death benefit (read becoming an investment instead of true insurance). So the MEC test is contained in this sentence (which is unduly hard to understand) - “The policy will be considered a modified endowment contract if the accumulated premiums paid at any time during the first seven years after the policy is established exceed the sum of the net level premiums that would have been paid on or before such time if the future benefits provided in respect of the policy were deemed to be paid up after the payment of seven annual premiums.”
In english that means that at ANY point in the first 7 years if the premiums paid are greater than what would have been needed in a paid up contract then you are socking away too much cash. For example, I could go out and get a $100,000 policy and pay it up in seven years. This would mean I no longer have any premium for the given death benefit. Let’s say my premiums were $15,000 a year ($105,000 over 7 years) for the paid up contract. Now if I had a whole life policy that was over my lifetime but I had paying premiums of more than $105,000, say $125,000, over the first 7 years then I have a MEC. The same test could be run at year 1,2,…7
I would basically be using the insurance contract to put away the extra cash of $20,000 ($125,000-$105,000=$20,000) on a tax defered basis. This goes against why governments orignally gave tax exempt status to the insurance companies. They are no longer providing insurance, but are now offering a tax deferred accumulation vehichle.
Slick people would over pay there premiums early and then take loans from their policies to get some of the cash back, all while enjoying the tax deferal. MECs put an end to all that.
Hope this helps.
Insurance companies are given tax exempt status because governments realize that they are doing society a favor by offering insurance. Of course once they have been granted tax exempt status the insurance companies will inevitably attempt to abuse it. A MEC is an example of that abuse.
So it basically boils down to whether more cash is being socked away in a policy than really needs to to cover the death benefit (read becoming an investment instead of true insurance). So the MEC test is contained in this sentence (which is unduly hard to understand) - “The policy will be considered a modified endowment contract if the accumulated premiums paid at any time during the first seven years after the policy is established exceed the sum of the net level premiums that would have been paid on or before such time if the future benefits provided in respect of the policy were deemed to be paid up after the payment of seven annual premiums.”
In english that means that at ANY point in the first 7 years if the premiums paid are greater than what would have been needed in a paid up contract then you are socking away too much cash. For example, I could go out and get a $100,000 policy and pay it up in seven years. This would mean I no longer have any premium for the given death benefit. Let’s say my premiums were $15,000 a year ($105,000 over 7 years) for the paid up contract. Now if I had a whole life policy that was over my lifetime but I had paying premiums of more than $105,000, say $125,000, over the first 7 years then I have a MEC. The same test could be run at year 1,2,…7
I would basically be using the insurance contract to put away the extra cash of $20,000 ($125,000-$105,000=$20,000) on a tax defered basis. This goes against why governments orignally gave tax exempt status to the insurance companies. They are no longer providing insurance, but are now offering a tax deferred accumulation vehichle.
Slick people would over pay there premiums early and then take loans from their policies to get some of the cash back, all while enjoying the tax deferal. MECs put an end to all that.
Hope this helps.
mwvt, to clarify a bit on your last paragraph.
MECs only put an end to your ability on taking tax free loans from your insurance policy, your beneficiaries still receive the death benefit from your policy income tax free.
Now as far as what slick people would do, they would make sure that the amount of money they contribute to the policy plus interest earned on that money within first 7 years won’t exceed the death benefit (the value of your insurance policy) and may fully found the policy, say at the end of year 8. This way you satisfy 7 year rule, have your policy classified as non-MEC, and thus have your money grow tax free, being able to tap that money for tax free loans for as long as you are alive, and then have your beneficiaries to get the death benefit of the policy tax free.
MECs only put an end to your ability on taking tax free loans from your insurance policy, your beneficiaries still receive the death benefit from your policy income tax free.
Now as far as what slick people would do, they would make sure that the amount of money they contribute to the policy plus interest earned on that money within first 7 years won’t exceed the death benefit (the value of your insurance policy) and may fully found the policy, say at the end of year 8. This way you satisfy 7 year rule, have your policy classified as non-MEC, and thus have your money grow tax free, being able to tap that money for tax free loans for as long as you are alive, and then have your beneficiaries to get the death benefit of the policy tax free.
volkovv Wrote:
——————————————————-
> mwvt, to clarify a bit on your last paragraph.
>
> MECs only put an end to your ability on taking tax
> free loans from your insurance policy, your
> beneficiaries still receive the death benefit from
> your policy income tax free.
Right, I am with you here.
>
> Now as far as what slick people would do
I meant before the MEC rules were in place with my comments.
, they
> would make sure that the amount of money they
> contribute to the policy plus interest earned on
> that money within first 7 years won’t exceed the
> death benefit (the value of your insurance policy)
> and may fully found the policy, say at the end of
> year 8. This way you satisfy 7 year rule, have
> your policy classified as non-MEC, and thus have
> your money grow tax free, being able to tap that
> money for tax free loans for as long as you are
> alive, and then have your beneficiaries to get the
> death benefit of the policy tax free.
Dancing around the edge of the rules, huh?
You seem to know this stuff pretty well volkovv, is it just from L3 or do you work in PWM?
——————————————————-
> mwvt, to clarify a bit on your last paragraph.
>
> MECs only put an end to your ability on taking tax
> free loans from your insurance policy, your
> beneficiaries still receive the death benefit from
> your policy income tax free.
Right, I am with you here.
>
> Now as far as what slick people would do
I meant before the MEC rules were in place with my comments.
, they
> would make sure that the amount of money they
> contribute to the policy plus interest earned on
> that money within first 7 years won’t exceed the
> death benefit (the value of your insurance policy)
> and may fully found the policy, say at the end of
> year 8. This way you satisfy 7 year rule, have
> your policy classified as non-MEC, and thus have
> your money grow tax free, being able to tap that
> money for tax free loans for as long as you are
> alive, and then have your beneficiaries to get the
> death benefit of the policy tax free.
Dancing around the edge of the rules, huh?
You seem to know this stuff pretty well volkovv, is it just from L3 or do you work in PWM?